Delivery in day(s): 3
ECON11026 Principles of Economics Assignment Help
Fiscal and monetary policies are two measures or main drivers of country’s economy. This assignment is about the importance of Fiscal policy and the impact of changes in the fiscal policy on the country’s economy. Fiscal policy measures help country in balanced economic growth and stabilisation. According to De, S. (2012), fiscal policy is an important component of economic framework of each country and it is internally connected with general economic policy strategy. This assignment explains the fiscal policy and its role in the modern economy of Australia. This assignment explains the strength and weaknesses of fiscal policy and how government can use spending cuts and taxation for stabilising the economy and budget deficit. This assignment explains the contribution of fiscal policy to the economy growth of country.
Fiscal Policy: Fiscal policy is a tool used by government for adjustment of its spending levels against the prevalent tax rate to monitor and influence country’s economy (Asaju, Adagba & Kajang, 2014). Government officials coordinate their fiscal policy with monetary policy of central bank. Government can adopt and follows the fiscal policy in two ways:
Expansionary Fiscal Policy
Contractionary Fiscal Policy
Expansionary fiscal policy used by government for increasing money flow in the market. Money can be supply in the market through more spending by government or cut tax rates.
It helps in boosting country's economy by running business, create job opportunities etc.
This is rarely used by government. It is just opposite of Expansionary fiscal policy and adopted by government for slow economic growth.
Government increase the tax rate or reduces the spending level to reduce the money supply in the economy.
Role of Fiscal Policy in current:
Fiscal Policy plays very important and vital role in the economic growth and development of any country. Budget, taxation, public spending and public debts are the instrument of fiscal policy. Budget and taxation help government in controlling expenditure in economy and maintain sustainable development of it (Asaju, Adagba & Kajang, 2014). Fiscal policies play a significant role in economic growth in following manner:
Movement of resources
The fiscal policy helps in movement of financial resources within the economy. To accelerate economic growth government adopt expansionary fiscal policy and increase level investment and consumption in the economy.
Enhance growth rate
With the use of tools like taxation, public debt, public spending fiscal policy enhances the growth rate of economy of country.
Increase rate of public investment
Fiscal policy encourages individuals for making investment in the desirable channels which brings economic growth.
The fiscal policy helps in generating employment opportunities for individuals which accelerate economic growth.
Deflationary gap is the difference between full employment and actual employment output in the economy. Deflationary gap arises when aggregate demand is lower than the aggregated supply in the market. In the deflationary gap, economy faces maximum unemployment situation.
Fiscal policy may be adopted to decrease deflationary gap in the economy. Deflationary gap can be removed if government have budget surplus then it can cut taxes or increase its spending level. This may lead to increasing money flow in the market and improvisation of consumption level of individuals. Business opportunities will also increase which lead the job creation ultimately increase in the aggregated demand and reduce the deflationary gap available in the economy. If government of Australia control its budget deficit and apply the expansionary policy then it can come out from deflationary gap (Davidson, 2011).
Thus, government adopt and follows fiscal policy for attaining objectives of continued supply of public goods for the welfare of society and stabilise fluctuation faced by economy time to time. Expansionary and contractionary approaches are used by government for sustainable and stabilise growth of the economy of country.
Current Stance of Fiscal policy of Australia:
As per the result stated by MYEFO, Current economic state of Australia is in deficit. Australia is facing budget deficit increasing by $37 billion as compared to last year. Prices of iron ore are also come down. Australia is facing budget deficit from the year 2014-15 but it is still declining year by year (Makin, 2016). In order to limit budget deficit government put control on its spending. Highlights of fiscal scenario of Australia are as follows.
Currently Australian economy facing budget deficit but it is in good position in comparison to previous years.
GDP rate of Australia:Budgeted GDP was 2.8 per cent and Australia reached nearby the level of Budgeted GDP it is growing to 2.75 % in year 2016-17 (Australian Government, 2016).
Unemployment: Australia improving its unemployment rate by deploying funds in small and middle size business which generate job opportunities for individuals and reduce the unemployment rate.
Along with business government provide cuts for health care organisations and also going to include high earner families into the middle-income tax bracket. The federal government is focusing on job employment opportunities and growth and control its spending to remove deficit from the economy. Government is also provided additional funding to department related with defence for countermeasure terrors.
Presently economy of Australia is facing budget deficit and but it is expected by government that there will boom in Australia’s economy and they will be in surplus position. To improve the economic position Australian government take some major changes to bring the economy in surplus. These are as follows:
1. The main focus of federal government is job creation and economy growth.
2. Government revised tax rates for small and middle size business from 28.5% to 27.5 %, to which will increase the consumption level of such businesses and create job opportunities for individuals. Such tax cuts help in improving the money supply in the economy and decrease in unemployment rate. Ultimately cash flow in the economy will improve and which help government to return the budget from deficit to surplus by 2020-21.
3. To put control on spending level government does not make any new announcement related to infrastructure.
4. To reduce the budget gap government declared a new tax for multinational corporations (Australian Government, 2016).
Comparison of Australia’s budget deficit with OECD’s economy:
Australia is one of the member countries of OECD. OECD’s countries economy and Australia economy was facing problem of financial crisis in the year 2008-09 , affect of same is still reflected in the country's economy. Currently, Australia is facing budget deficit in its economy which is sign of slow economic growth. Economy of Australia is better than the average economic condition of OECD's countries. Still, Australia is facing problem but government of Australia issued some structural reforms in many areas of economy. Australia is in improved condition than the other country after the recession faced by the global economy, the reason behind this is that Australia expands its area geographically and mobilised its resources and make good investment and trade relation with other countries in Asia. It can be considered that economic policies of Australia are stronger and appropriate in comparison to the Economic policies adopted by OECD country.
According to mid-year outlook on the fiscal policy of Australia, it is identified that Budget deficit increase with $37 billion in the year 2016-17 in comparison to the previous year. It is very worse situation of Australian economy. Budget deficit is indicates the financial growth of country’s economy. Budget deficit increase when levelling of government expanding increases than its revenue. Tax collection is the main source of government revenue. While government spending includes expenditure on education, defence, health and infrastructure. Australia faces budget deficit because government expenditure is more structured than cyclical (Murrja, Ndregjoni, & Cerpja, 2014).
There are factors which are responsible for budget deficit and its continuous deterioration. These factors are as follows:
Increase in unemployment rate:In the mid -year Unemployment rate in Australia was reach up to the mark of 6%.The reason is fewer job opportunities available in the economy for the individuals. When there is no availability of job in the economy movement of money becomes slow. Slow movement will decrease the consumption or demand of money in the economy which ultimately affects the economic growth rate or GDP rate of the country. When GDP is not growing economy will face budget deficit.
Heavy tax rates: Federal government of Australia imposes heavy tax burdens on middle and small business houses. Due to heavy tax rates, business cannot grow in the economy and earn lower profit. Lower growth rate will affect the economic growth. Government could not provide assistance for the development of these business houses. Heavy tax rates restrict the growth of small business and could not provide create job opportunities and earn low-profit level which ultimately affects the revenue of government and budget deficit take place.
Excessive spending:Australian Government spend more in infrastructure project then the revenue available to them. Excess spending will arise situation of budget deficit in the economy of country.
For systematic and structured economic growth government of Australia makes changes in its spending level. Government of Australia put offset their spending with some saving measures. Government decided to give tax rate reduction for middle and small business which creates job opportunities and growth opportunities for business organisation. It ultimately affects the revenue of government but brings some economic growth in the country. Rather cutting or offset spending level government prefer and adopt some savings measures which are as follows:
1. Save $2 Billion which are wrongly claimed by people for welfare purpose.
2. Removal of bulk billing incentives in pathology, diagnostic and MRI service.
3. Government put limit on subsidies provided for childcare to those families who are earning $2,50,000 or more.
4. Government cuts $ 472 million from aged care services.
These all measures proved that Australian government adopt fewer cuts in their spending and put changes in their funding plans which help in improvising budget deficit which is very clear and good move with respect to economic growth.
Effect of Government Spending Cuts:
Such spending cuts in infrastructure sectors and saving measures adopted by Australian government will help Australian economy in its growth. If Spending cuts are implemented by the government will increase the revenue of government and it can use this fund for growth of business sectors and job creation in the economy. At the time of recession and to balance the budget of the economy government put cut on its spending to strong the economy of country. Small spending cuts also weak the confidence of consumer and business which can push back the economy in recession (Fawwaz, 2016).
Macro economics Indicators are those factors related to change in Gross Domestic Product (GDP) and Gross National Product (GNP) these indicators are the sign of country's health. According to Malik & Malik (2013), Macroeconomics indicators have significant impact on country's economy. Macroeconomic indicators can be categorised into two types:
Leading indicators:It influence the economy of country prior adjustments and help in predict future trend of the country.
Lagging Indicators:It indicates economic performance of the country and changes in these identified after establishment or adjustment of trend in the economy of country.
Change in the level of GDP
Income and wages
Consumer Price Index (CPI)
New business start-ups
Current state of macro economies indicators in Australia
GDP rate: Australia’s economy is slowing down. The estimated GDP growth rate is 2.6 %, in reality; it is 2.5 % which is very low. Which is quite higher than forecasts made by economist. Such growth rate is showing that Australian economy is not in good state.
Unemployment rate:According to Aiyedogbon & Ohwofasa (2012), unemployment rate shows the misuse of production factors like labour for fostering economic growth of the country. Unemployment rate is very high there is lack of job creation of Australia and does not grow properly. The reason for such increasing unemployment is lack of government spending in business industry and higher tax rates. But in the year 2017 unemployment rate may remain at 5 to 51/2 percent in the economy due to government spending plans.
Income and wages:
The above table shows the actual outcomes of wage price index in the year 2015-16. This table shows that there is a possibility of increasing the wage price index of the country in the year 2017 by 2 ½ from previous year which is good sign for country’s economy.
Consumer Price Index (CPI): Consumer price index is a statistical estimate which is used to measure change the price level of consumer goods available in the market.
The above graph shows that Australia’s CPI is continuously rising which shows there is inflation in the market and cost of consumer goods and services increases. The CPI of Australia can be increased in the year 2017 which may bring budget deficit in worse situation (Mahmoud, 2015).
Government Spending Cuts:
To improve the economy of country government of Australia need to improve its spending and taxation arrangements. Government put limits or exercise control on its spending level and provide support for the welfare of society where it needed. Government starts spending in job creation sector and put control on unemployment rate.
Factors that might have worsened the severity of deficit:
According to the MYEFO budget deficit of Australia will raise $23.8 billion in the year 2017 and become reached severity level. Generally, budget deficit is related to generation of revenue of government through taxation. Budget deficit incurred when government receives slow tax revenue from economy. The main reason for increasing budget deficit in Australia is expansionary fiscal policy. Under this fiscal policy, government starts spending funds for development and welfare of society or cut taxes of individuals. But there are certain other factors which may lead to the fiscal deficit. These factors are as follows:
Tax evasion:Tax avoidance is not a crime but tax evasion is an illegal practice which affects the government revenue. It might be possible that in Australia many taxpayers may evade tax duties which affect the level of revenue of Australia.
Income and wealth inequality: Large difference between higher and lower income earning society with reference to income and wealth. Higher income earning families misuse the tax incentive schemes and save tax and cut the tax collection of government and lower income earners are not liable to pay tax. Such situation put government in budget deficit problem.
Financial assistance: Government provides assistance or excessive financial support for the development of various sectors and its spending become more than its earning will raise the situation of severe budget deficit.
Excessive spending for social welfare: Government starts spending excessively for its fast growing aged population in the form of pension which can be a cause of budget deficit.
Thus in the context of Australia budget may go into deficit and reach at its severe level because of excessive funding and financial support to society and less earning income from taxation.
Strength of Fiscal Policy in stabilising the economy:
According to Chowdhury & Afzal, (2015), Monetary and fiscal policy are two measure tools for controlling the economy and budget balances. Some structural and cyclical fluctuations take place in the economy of the country which can only be controlled through change in fiscal policy. Fiscal policy can control inflation and help in overcoming from recession in the economy. To stabilise and improve the economic growth of the country Fiscal policy can adopt following factors as its strength which will contribute in stabilising the economy in the situations of inflation and recession.
Increase in government Expenditure: During the time of recession, government increases its level of expenditure in developing infrastructure of the country. it spends its funds in public works like building roads, ports, telecommunication links, defence, social welfare etc. These spending have direct and indirect effect on the economy.
Reduction of Taxes: Reduction of tax rate will increase the consumption level in the economy. Reduction of taxes increases disposal of income of society it creates growth opportunity for businesses and employment opportunities for individuals and stabilises the economy of country (Gemmell & Au, 2012).
Decrease in Government expenditure: overcome the situation of inflation and budget deficit government will decrease their expenditures or spending level in the economy which put limit on consumption and disposal of income of individuals and society. Decrease in government spending will decline the level of national income and reduce the effect of inflation.
Increase in Taxes:Government increase the tax rates and impose heavy duties on businesses which ultimately reduce the profit margin and income level of individuals. Lower income level will decrease consumption level and aggregate demand of consumer goods will also decrease prices of goods come down and inflation can be removed from the economy (Gemmell & Au, 2012).
1. Unable to identify the actual amount or level of revenues or expenditures which may take place in the economy because these all are flexible, not structured. Effectiveness of fiscal policy measure depends on their correct timings (Kakar, 2011).
2. Administrative delay: Administrative delay in approving the changes in tax rates and government expenditure is also a main limitation of success of fiscal policy.
3. It may be possible that government action of increasing expenditure will adversely affect the private sector of country. For example, if government demand more labour and material then it will affect the private sector of the country.
4. Success of fiscal policy measures depends upon economic and psychological reaction of people for these measures.
Thus, Fiscal policy has some strength which contributes to stable and sustainable growth of economy but it has some limitations which affect the success level of fiscal policy measures (Kakar, 2011).
This assignment explains briefly the components of fiscal policy which includes government expenditure, taxation, investment or disinvestment strategy and surplus and deficit management of budget. This assignment explains the concept of inflationary gap which is currently faced by Australia and measures which can be taken by the government to overcome the gap of inflation. This assignment explains the current situation of Australian economy and reasons due to which economy faces budget deficit. This assignment provides recommendation which government should use to remove its budget deficit and convert into budget surplus. This assignment explains that macro economy factors include various components like inflation, unemployment, public expenditure etc. This assignment explains the real economic conditions of Australia and measures which can be adopted by government for healthy growth and improvement of GDP of the country.
Aiyedogbon, J. & Ohwofasa, B., 2012, “Poverty and youth Unemployment in Nigeria, 1987-2011”, International Journal of Business and Social Science, Vol. 3, pages 269-279.
Asaju, K., Adagba, S.O. & Kajang, T.J., 2014, “The Eficacy of Fiscal Policy in Promoting Economic Growth and Reducing Poverty in Nigeria”, Research in World Economy, Vol. 5, pages 65-74.
Australian Government, 2016, “Why Australia benchmark report 2016”, Australian Trade Commision, pages 1-61.
Chowdhury, L. S. & Afzal, M.N. I., 2015, “The Effectiveness of Monetary Policy and Fiscal Policy in Bangladesh”, Journal of Applied Business and Economics, Vol. 17(1), pages 78-85.
Davidson, L.F., 2011, “The causes of price inflation & deflation: fundamental economic principles the deflationists have ignored”, Libertarian papers, VOL. 3, pages 1-49.
De, S., 2012, “Fiscal Policy in India: Trends and Trajectory”, pages 1-28.
Fawwaz, T.A., 2016, “The Impact of Government Expenditures on Economic Growth in Jordan (1980-2013)”, International Business Research, vol.9, pages 99-105.
Friedman, B.M., 2012, “Monetary Policy, Fiscal Policy, and the Efficiency of Our Financial System: Lessons from the Financial Crisis”, International Journal of Central Banking , Vol. 8, pages 301-309.
Gemmell, N., & Au, J., 2012, “Government size, fiscal policy and the level and growth of output: a review of recent evidence”, First Annual Workshop on Economic and Policy Developments in East Asia, pages 1-48.
Kakar, Z.K., 2011, “Impact of Fiscal Variables on Economic Development of Pakistan”, Romanian Journal of Fiscal Policy, Volume 2, pages 1-10.
Mahmoud, L. O. M., 2015, “Consumer price index and economic growth: a case study of Mauritania 1990 – 2013”, Asian Journal of Empirical Research, Volume 5, pages 16-23.
Makin,T., 2016, “The effectiveness of federal fiscal policy: a review”, Commonwealth of Australia, page 1-27.
Malik,S., & Malik, Q.A., 2013, “Empirical Analysis of Macroeconomic Indicators as Determinants of Foreign Direct Investment in Pakistan”, IOSR Journal of Business and Management, Volume 7, pages 77-82.
Murrja, A. , Ndregjoni, A. & Cerpja, T., 2014, “Causes of the growth of public debt and budget deficit in albania: report based on raport rule of maastricht (60/3 of gnp) - recommendations for reducing these parameters”, European Scientific Journal, vol.10, pages 507-518.